Just over a month ago on September 10, 2018 the New York based blockchain company Paxos announced the release of a new stablecoin called Paxos Standard, with the ticker symbol PAX.

This is a fully USD-collateralized stablecoin that is being released by Paxos Trust Company. It is also regulated and approved by the New York State Department of Financial Services.

Paxos Standard was released at the same time as another stablecoin, the Gemini Dollar (GUSD), and because the Gemini Dollar is linked to the Winklevoss twins exchange Gemini it received more media attention and overshadowed PAX to some extent.

But PAX is just as interesting and deserves a close inspection.

What is Paxos?

Paxos describes itself as “the first regulated Trust company with blockchain expertise”, and it is using that expertise to create a modern settlement solution that can eliminate risk and simplify settlements.

Paxos Overview
Paxos Overview. Source: Paxos Website

What many people may not know about Paxos is that it was actually founded in 2012 as Paxos Trust Company, and that for most of its life it ran the cryptocurrency exchange itBit, which is still operates. The creation of Paxos was a pivot from an exchange platform to a company focused on creating a modern settlement platform using blockchain technology.

In the press release from Paxos, it says that

as a Trust company, Paxos is a fiduciary and qualified custodian of customer funds, and can therefore offer greater protections for customer assets than any other existing stablecoin

Here are some important facts you should know about the Paxos Standard:

  • It is an ERC-20 token built on the Ethereum blockchain;
  • After registering and becoming verified, users can purchase and redeem PAX tokens directly at Paxos.com on a 1:1 basis with the U.S. dollar;
  • Paxos tokens only remain in circulation as long as there are corresponding U.S. dollars being held in reserve. When PAX are redeemed for USD the tokens are immediately burned, or destroyed;
  • When trading on the itBit platform that is also owned by Paxos, investors will be able to withdraw other digital assets to PAX instantaneously and without fees;
  • Paxos Standard will trade under the ticker symbol PAX, and while it remains a utility token it will also be available on other exchange platforms;
  • Because Paxos Standard was created as an ERC-20 token it can be stored in any ERC-20 compatible wallet;
  • The PAX smart contract has been audited by Nomic Labs, a respected smart contract auditor, and the account reserves will be audited by Withum, a nationally top-ranking auditing firm.

Paxos Adoption

Paxos has become the most widely adopted cryptocurrency in the fastest time frame, with support from over 20 exchanges and OTC desks in the first five weeks of its existence.

It’s been picked up and listed by six of the top ten cryptocurrency exchanges, Binance, OKEx, Gate.io, ZB, KuCoin and DigiFinex. And additional exchanges have plans to list PAX very soon, including OKCoin. These exchanges are offering PAX as an alternative to the controversial Tether (USDT).

Exchanges Listed Paxos
Exchanges That have Listed Paxos. Source: Paxos Standard

Additionally, numerous Over-the-Counter (OTC) trading and market-making firms including SFOX, XBTO, Cumberland, Hudson River Trading, Galaxy Digital, FBG Capital, Two Rivers, Alameda Research, OSL, DV Chain and QCP Capital are ready to support large trades from sophisticated investors.

Because PAX offers immediate settlement and verified reserves, it has rapidly become a trusted stablecoin among traders.

The rapid institutional adoption of the token shows how strong demand is for a regulated stablecoin backed by U.S. dollars, that can be trusted by traders. In the five weeks since its launch Paxos has already issued $50 million in PAX, and the demand has shown no signs of slowing.

However, even with all the news surrounding Paxos new stablecoin, Paxos is not just a USD-pegged cryptocurrency. Instead it is primarily a platform for payments.

With that being the case, what are the prospects for the future development of Paxos? And do we really need another stablecoin?

Paxos History

Remember that Paxos is not a new project. It has long existed and been known as a family of protocols that are designed to resolve consensus issues in a network of unreliable processors.

Paxos Trust Company has been registered in New York since 2012, and has long offered the cryptocurrency exchange itBit prior to morphing into a blockchain platform for settlements in 2018 and offering a stablecoin.

Paxos Team

Unlike the controversy surrounding the people who control Tether, there is no such obscurity when it comes to the people behind Paxos. The CEO and co-founder is Charles Cascarilla. He has  over 15 years in financial services and has co-founded Cedar Hill asset management back in 2005. He has also worked and Bank of America and Goldman Sachs prior to that.

Paxos
Paxos Team. From Left: Charles Cascarilla (CEO), Andrew Chang (COO), Rachel Nelson (Compliance), Rajesh Nair (Engineering)

Joining him in the top team is Andrew Chang as the COO. He has over a decade of experience at a number of other technology companies and is a partner at Liberty city ventures. Prior to Paxos he worked at Google in business development for their display products. The rest of the managerial team is similarly experienced with numerous industry veterans.

Another really compelling pitch behind Paxos is the advisors that they have through their board of directors. You can see the full list here but these include Sheila Bair, the former head of the FDIC and Bill Bradley who is a former senator from New Jersey who served as chairman of the Senate Finance Committee.

The Paxos Platform

Paxos has created a platform that combines distributed ledger technology with its status as a regulated trust in order to minimize settlement risk.

Paxos representatives characterize their platform using the formula:

Paxos Forumla
Source: Paxos Website

The rationale behind building such a platform is explained simply. By having a regulated trust, Paxos is legally able to transfer assets and monies. By combining that permission with blockchain technology those transactions can be done rapidly, securely, and without risk. This combination can be integrated into business and finance to solve the long standing problem of settlement risk.

Paxos made the decision to create its platform without a native blockchain, and has based itself on the Ethereum blockchain instead. As far as I can tell based on information from the company website, there are no current plans to transition from Ethereum to its own mainnet.

Paxos Use Cases

In looking at the working documents of Paxos and their whitepaper we can see that the project is looking to solve the following problems:

  1. The rapid transfer of currencies as well as the immediate exchange of physical assets into digital assets. The goal of this is to minimize counterfeiting risks.
  2. Reduce or completely eliminate operating costs in trade operations.
  3. Minimization of commission and fees in connection with the transfer of funds.

The PAX Token

The Paxos Standard (PAX) is the first digital asset to be issued by a financial institution and to be fully secured by the U.S. dollar. While other similar stablecoins have existed, there has been no proof of full U.S. dollar reserves, nor have these earlier assets been issued by a financial institution. The Paxos team has been fairly clear in declaring the different base that PAX is working from.

PAX Token Use Cases
Source: Paxos Website

In theory, 1 PAX will always be equal to 1 USD. It’s too early to see how well this holds up in reality, but given the strict auditing and destruction of tokens exchanged for USD it seems realistic.

The PAX token is an ERC-20 token, and while it was initially released on the fairly unpopular itBit cryptocurrency exchange, it was rapidly adopted by a number of other exchanges, including the top 3 global cryptocurrency exchanges Binance, OKEx and ZB.com.

Some have questioned whether another stablecoin is necessary in the cryptocurrency ecosystem, and the Paxos team has addressed the question by highlighting the following features of PAX:

  • PAX allows user to convert digital assets to fiat currencies with no fees;
  • Because of the peg to the USD there is very little volatility associated with PAX;
  • Assets can be rapidly converted from physical to digital and vice versa very rapidly;
  • Each PAX token is backed by the U.S. dollar, which is held in accounts in major U.S. banks and is insured by the Federal Deposit Insurance Corporation (FDIC).

In practice, PAX is not so different from other cryptocurrencies, and this is especially true when compared to other stablecoins such as Tether, TrueUSD, and Gemini dollars. One difference is the use as a utility coin, with PAX being primarily for use on the Paxos platforms. It was never created as a tradable asset, but certainly can (and already is) be traded on third-party exchanges.

It remains to be seen if PAX will become more popular than Tether, which has never enjoyed great trust from cryptocurrency users, but has a great head start as the very first stablecoin.

Conclusion

Even though the Paxos Trust has been active in the financial services industry for six years, the new Paxos platform that is tied to blockchain technology is very new. This makes it difficult to say how successful it will be over time, although it does seem to have a solid value proposition.

Even though PAX is intended primarily for use on the Paxos platform, there is a chance that it will replace Tether as the most popular stablecoin, and that would see PAX supply growing massively.

The Paxos team has been very vocal and positive regarding their project and the PAX token, and this is to be expected, but in reality the PAX token offers little that is innovative in the blockchain space.

Its real strength lies in the full USD backing and the backing of traditional financial institutions. That alone should be enough to keep it from getting lost among other projects, especially given the auditing and additional trust it will gain versus competing stablecoins.

Featured Image via Paxos.com

Posted by Steve Walters

Steve has been writing for the financial markets for the past 7 years and during that time has developed a growing passion for cryptocurrencies.